Real Estate Leasing and Investment Firm Financial Model: Case Study

Background 

This case study is about a U.S.-based leasing and investment firm that wanted us to evaluate the validity of its leasing model based on future revenues and its ability to pay back its lenders. The client already had a diverse real estate portfolio for leasing purposes and some historical loans. In this Case Study, we have presented the process and analysis techniques we used to prepare a detailed financial forecast model for our client. 

Challenges

• The main challenge was that our client had taken loans in different currencies; they had a diverse basket of loans; however, the leasing operations were denominated in U.S. dollars.
• Moreover, we had to conduct extensive research to understand market risk and return factors to determine the expected interest rates for each loan.
• Ultimately, we had to develop the most suitable borrowing ratio in all different currencies to maximize returns for our client.
• A challenge was to give them flexibility and to keep inputs dynamic, which required implementing complex logic through excel formulas.
• The significant issue for our client’s real estate leasing business was that their operations had already started, but they could not earn a profit on their current model. Hence, they wanted us to figure out the time till they start making profits and to estimate its value.

Solution

• We did research on currency exchange models; our first step was to prepare a sound foreign currency swap model for our client. Which will assist them in understanding their current borrowings in a better way and the future as well. 
• Moving forward, we not only did a thorough analysis of the U.S. real-estate and leasing market, but we also studied the past financial statements of our client as well.
• Further, we started making dynamic proforma financial statements for our client. These were prepared for the next five years in a manner that the client could get different estimated returns based on changing their borrowing decisions and leasing strategies.

PESTEL Analysis

In order to understand the real estate and leasing policies, we needed to perform a PESTEL analysis. Hence, we performed a PESTEL analysis for our client to analyze the political situation surrounding their property portfolio. In addition, we explored the environmental and legal aspects of our client’s target market. This helps us understand the laws and regulations in the area so that our client can make decisions accordingly. 

Financial Model

Input Assumptions 

We developed the assumptions considering the investment and leasing techniques into account. Our first focus was on the current and historical borrowings of our client. We found out that their current borrowings were in Botswana Pula currency. Our client had shared that they were also planning to borrow in U.S. dollars and European Pounds in the future. So we found out the exchange rates of all these currencies and created a foreign currency swap model. Based on this real estate leasing model, we added a loan basket in our input sheet so the client can decide on the proportion of total borrowing for each currency accordingly.

Operational Expenses

The operational expenses were calculated to understand the fixed costs for each year. As our client was in the real estate leasing business, a significant chunk of operational expenses went to the financial consultants’ salaries. These salaries and other fixed costs were extracted from their past profit and loss statements.

Revenue Analysis

A comprehensive revenue analysis required us to consider all the revenue streams. We discovered that the client had three main revenue streams: fund management, initiation, and monthly administration fees. Therefore, our revenue model was divided into these three types. Further, our calculations were based on the targeted new leases for each year. So, we built a dynamic revenue model that considers all factors affecting revenue generation. This sheet also estimates the cost of services that our client provides, mainly comprised of debt servicing costs. These were the monthly variable costs.

Proforma Financial Statements

The next step was to prepare projected financial statements for the client for the next 60 months. This was necessary to gauge the future success of the company and its ability to repay its debt obligations. For this purpose, we obtained the previous financial statements of our client. These accounts helped us understand the client’s financials in a better way and to shape our assumptions accordingly. All figures were denominated in U.S. dollars.

Balance Sheet

Firstly, we created the balance sheet. This represented the liabilities and assets to be owned by the company in the next five years. As the client was hoping to fund all its operations from external loans, the equity investment was assumed to be zero for the next five years.

Cash Flow Statement 

To examine the cash-generating ability of our client over the next five years, we created a cash flow statement as well. These statements considered the timing and amount of inflows and outflows from operations. This was a sure way of calculating the potential funding requirements.

Income Statement

One of the main requirements of our client was that they wanted to know the profitability of their business. They wanted to know the expected timeline for when their company would be able to make profits. Additionally, they wanted us to provide them with an interactive real estate leasing financial model which they could use to estimate the profitability using different financing and leasing strategies. Thus, our consultants built a monthly income statement sheet for the next 60-month period and also a summarised version of the yearly income statement. These profit and loss statements were created using elaborate excel formulas so the results would change by inserting different strategies in the input sheet.

Investment Summary

In this section, we presented a startup summary, which was an overview of the client’s real estate leasing business funding requirements for the first year of projections. The total funding amount was taken as the current loan available. This summary was created to convey to the client the additional funding they would require in the coming year to run their operations smoothly.

Breakeven Analysis

This table was created to estimate the revenue the company would have to generate each year to reach the breakeven point. It was calculated based on fixed and variable costs of each year.

Company Evaluation

We also evaluated the company’s performance based on its financials. The Weighted Average Cost of Capital (WACC) was first calculated based on debt and equity ratios. Then the net cash flows from the cash flow statement were used to calculate NPV. This valuation gives investors a chance to evaluate the company’s future performance.

Diagnostic Sheet

The ratios are the perfect tool to analyze the financial performance of a business. We devised a diagnostic tool that calculated critical ratios and provided an automatic analysis based on industry benchmarks.

Dashboard

Finally, all our findings were presented efficiently in the form of visualizations in a dashboard. This dashboard was created based on all the crucial KPIs for our client. It presented a snapshot of their financial performance in the next five years.

Conclusion

In conclusion, we found out that our client’s real estate leasing company did not have significant growth potential in the future. Earning the same revenue for the next five years, they will not be able to meet the increasing costs. Besides the cost of services, the loan servicing costs needed to be lowered to be paid off from the revenue amount. Hence, it was time for them to review their real estate leasing business model if they wanted to earn profits in the next five years.

The competent team at Oak Business Consultant utilized their skills to do a comprehensive analysis for the client. So they could build the proforma financial statements with the utmost accuracy. This is the reason that our consultants stand out and perform exceptionally well. Finally, we consider every aspect of the client’s real estate leasing business to provide a critical viewpoint in developing their journey.